practical problem( leverages)

PRACTICAL PROBLEMS :-


1.Following information is given calculate operating leverage, financial leverage and combined leverage:



Sales                                      4,00,000
Less: Variable cost                1,40,000
CONTRIBUTION                 2,60,000
Less:fixed cost                      1,80,000
EBIT                                        80,000
Less:Interest                            10,000
EBT                                         70,000

ANSWER:- OPERATING LEVERAGE = CONTRIBUTION / EBIT
                                                                     
                                                                  =2,60,000
                                                                     80,000
                                                                  =3.25

                    FINANCIAL LEVERAGE= EBIT/EBT
                                                           
                                                                 =80,000
                                                                 70,000
                                                                =1.14

                COMBINED LEVERAGE=  OLXFL
                                                                   =3.25X1.14
                                                                   =3.705

2.GIVEN

FINANCIAL LEVERAGE=2:1
OPERATING LEVERAGE=3:1
INTEREST=20,00,000
TAX=40%
VARIABLE COST TO SALES=60%
FIND EBIT,CONTRIBUTION,AND FIXED COST

 ANSWER:-FINANCIAL LEVERAGE=   EBIT
                                                                        EBT
                                                       2:1=EBIT/EBT
                                                       2:1=EBIT/(EBIT-INTEREST)
                                                       2:1=EBIT/(EBIT-20,00,000)
                                                      2EBIT-40,00,000=EBIT
                                                     EBIT=40,00,000

             OPERATING LEVERAGE=CONTRIBUTION
                                                                       EBIT

                                                        3:1=CONTRIBUTION/EBIT
                                                       3:1=40,00,000
                                                       CONTRIBUTION=1,20,00,000
            VARIABLE COST TO SALES=60% (GIVEN)
            CONTRIBUTION TO SALES=40%  (100%-60%)
                                                SALES=(1,20,00,000/40%)X100%
                                                               =3,00,00,000
INCOME STATEMENT
SALES                                                 3,00,00,000
LESS:VARIABLE COST(60%)          1,80,00,000
CONTRIBUTION                               1,20,00,000
LESS:FIXED COST                              80,00,000       (CONTRIBUTION less EBIT)
EBIT                                                       40,00,000 
                                                               

3.What  percentage will  EBIT increase, if sales increase by 10% ? Use question 1 for reference.


ANSWER:  OPERATING LEVERAGE=CONTRIBUTION/EBIT
                                                              =1,20,00,000/40,00,000
                                                              =3
                IF SALES INCREASES BY 10%=3x10%=0.3
                       EBIT WILL INCREASE BY=0.3x100=30%


4. Calculate value of equity share of the company using WALTER'S MODEL from the information given below: 

Internal Rate  Of  Return(%) (R)                                      15
Capitalization Rate(%) (Ke)                                              15
Earning Per Share (In Rupees)                                          12
Cash Dividend Per Share(In Rupees)                                5

ANSWER: AS WE KNOW THAT WALTER'S MODEL IS =D+R/Ke(E-D)/(Ke)
where D=dividend per share
R=rate of return
Ke=capitalisation rate
E=earning per share

                                                                                                =5+0.15/0.15(12-5)/0.15
                                                                                               =5+1(7)/0.15
                                                                                               =12/0.15
                                                                                              =80 Rupees


5. XYLEM LTD. Gives below information. Calculate price per share when no dividend is declared using MM MODEL.

Shares Outstanding         25,000
Current Market Price       Rs 100 Per Share
Capitalization Rate (ke)    20%
Expected Net Profit          Rs 5,00,000

ANSWER:- MODIGLIANI-MILLER Dividend Irrelevance Model
Po=P1+D
      1+Ke
Po=current market price
P1=market price per share at the end of the year
D=dividend to be paid at the end of the year
Ke=is the capitalization rate

100=P1+0
        1+0.20

P1= Rs 120


6. Find price of share as per GORDEN MODEL from the details given below:
Earning per share=100
Dividend payout ratio=60%
Capitalisation rate=10%
Rate of return=10%

ANSWER:-
Gorden Model Po=E(1-b)/(Ke-br)
E=100
b=100%-60%=40%
Ke=10%
r=10%
Po=find
now Po=100(1-.40)/(.10-.40x.10)
Po=100x.60/(.10-0.04)
Po=60/.06


Po=Rupees 1000

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